Earnings Not Telling The Story For Wuhan Tianyuan Environmental Protection Co.,LTD (SZSE:301127) After Shares Rise 25%

Wuhan Tianyuan Environmental Protection Co.,LTD (SZSE:301127) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The annual gain comes to 187% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, there still wouldn't be many who think Wuhan Tianyuan Environmental ProtectionLTD's price-to-earnings (or "P/E") ratio of 38.9x is worth a mention when the median P/E in China is similar at about 37x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

The earnings growth achieved at Wuhan Tianyuan Environmental ProtectionLTD over the last year would be more than acceptable for most companies. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Wuhan Tianyuan Environmental ProtectionLTD

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Wuhan Tianyuan Environmental ProtectionLTD's earnings, revenue and cash flow.

Is There Some Growth For Wuhan Tianyuan Environmental ProtectionLTD?

The only time you'd be comfortable seeing a P/E like Wuhan Tianyuan Environmental ProtectionLTD's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a worthy increase of 12%. Pleasingly, EPS has also lifted 38% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's noticeably less attractive on an annualised basis.

With this information, we find it interesting that Wuhan Tianyuan Environmental ProtectionLTD is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Its shares have lifted substantially and now Wuhan Tianyuan Environmental ProtectionLTD's P/E is also back up to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Wuhan Tianyuan Environmental ProtectionLTD revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Wuhan Tianyuan Environmental ProtectionLTD is showing 3 warning signs in our investment analysis, and 2 of those are a bit unpleasant.

If these risks are making you reconsider your opinion on Wuhan Tianyuan Environmental ProtectionLTD, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.